Decline in oil prices to help ease pressures on Indonesia's trade balance

Merchandise trade balance has been narrowing on the back of Indonesia’s robust domestic demand but unfavorable commodity prices have exacerbated the issue, says DBS.

Here’s more from DBS Group Research:

The sharp fall in oil prices over the last two months will help ease pressures on the trade balance. The country’s merchandise trade balance has been narrowing on the back of its robust domestic demand but unfavorable commodity prices have also exacerbated the issue.

Since 1Q11, commodity prices have been on a firm downtrend (as reflected by the CRB index) while oil prices remained elevated up till April this year. This divergence in performance is negative for a net oil importer and a net commodity exporter (coal, gas and metals) like Indonesia and this has been reflected in the sharp narrowing of the trade surplus from USD6.6bn in 1Q11 to USD2.8bn in 1Q12.

In April, the trade balance actually dipped into negative territory for the first time in 21 months.

Renewed concerns about the global economy pushed Brent crude oil prices down by over USD30/bbl over the last seven weeks. In effect, oil is just starting to catch up with the declines in the prices of other commodities.

Our estimates indicate that a USD10/bbl drop in oil prices could lead to an improvement in the oil balance by around USD2.5bn a year (USD200mn a month on average). Accordingly, an improvement in the oil balance should materialize in the data for May and June.

However, it must be noted that the prices of other key commodity exports such as coal and palm oil have continued to slide.

With risks of a synchronized slowdown in the US, Eurozone and China in 2H, commodity prices are likely to weigh and this will translate into a sharply lower overall trade balance of USD7bn this year compared to USD26bn in 2011.